Adequate NBS rates to support profitability and credit profiles
Domestic sales volume of complex fertilisers1 will revert to the historical growth rate of 4-5% in fiscal 2025 after a strong 7-8% jump in this fiscal. This will be supported by expectations of a normal monsoon and stable retail prices.
Lower volatility in raw material cost will support commensurate nutrient-based subsidy (NBS) by the government and help improve operating profitability of manufacturers to a normalised level of about Rs 4,000-4,500 per tonne next fiscal after a decline this fiscal.
That, along with timely release of subsidies - in line with the trend seen in past few years - will keep working capital requirements low for fertiliser makers and credit profiles stable.
Says Naveen Vaidyanathan, Director, CRISIL Ratings, "The high volume growth this fiscal is riding on better availability and record pre-buying by farmers in the first half in anticipation of retail price hikes in the second half. Next fiscal, we expect it to be supported by expectations of adequate NBS rates and a normal monsoon. The medium-term growth outlook for complex fertilisers is positive as balanced soil nutrition is imperative for better productivity and yields, and availability is adequate and at subsidised rates."
Profitability, however, will see a sharp cut this fiscal before rebounding in the next.
For complex fertiliser makers, profitability is typically a function of raw material input prices, commensurate NBS rates and retail sales prices. NBS rates are typically revised bi-annually, in sync with raw material input prices, to keep the retail prices for farmers largely stable. This results in largely stable profitability.
The story has been different this fiscal. Declining raw material prices in the first half led to a slashing of NBS rates for diammonium phosphate (DAP) and nitrogen, phosphorus and potassium (NPK) grades by 40% for the second half. However, contrary to expectations, prices of raw materials such as phosphoric acid, ammonia, rock phosphate and sulphur subsequently rose and are higher2 than first-half levels.
Says Nitin Bansal, Associate Director, CRISIL Ratings, "Operating profitability of complex fertiliser makers is expected to decline 30-35% to Rs 3,000-3,500 per tonne this fiscal as limited ability to pass on higher raw material prices amid a sharp reduction in NBS rates will result in lower profits. But next fiscal, profitability is expected to normalise to Rs 4,000-4,500 per tonne on expected revision in NBS rates in line with more stable raw material prices."
That said, reduced subsidy requirement due to lower NBS rates and timely disbursement of subsidies are largely offsetting the impact of reduced profitability on net leverage. |
